Tuesday, March 29 2011
Brambles Outlook Improving
Brambles is a company that has struggled in recent years. Key issues that have overhung the company include:
- The macro environment in the US where retailers have reduced the amount of stock they have carried.
- The former CEO of the US business left, raised capital and formed a competitor (iGPS) that offered plastic pallets. iGPS has won around 20% market share.
While the macro environment has been difficult Brambles has remained a strong business in our view. It earns a large profit margin, a good return on equity and it is difficult to replicate its business. It is operating in a range of new markets such as India and China which offers a strong long term growth opportunity.
The outlook for Brambles is now improving. We see three factors driving this improvement:
- A pick up in the US economy meaning confidence is improving and retailers are beginning to restock.
- Brambles have purchased a company called IFCO which extends Brambles offering towards a broader range of pallets. It also adds around 10% to earnings per share and enables it to compete with plastic pallet offerings.
- Their key competitor in the US (iGPS) is in trouble. Their strategy included a very noisy marketing / PR campaign designed to create momentum. The problem was the economics of their business did not really stack up with the expensive plastic pallets being sold too cheaply. iGPS have hit a road block with the fire retardant used in the plastic being a carcinogenic. This has been banned in 12 States as well as by influential retailer Walmart. The CEO (and founder) and CFO have been sacked, we understand the company is running out of money and as a result the service standards are dropping. We think this is very good news for Brambles. iGPS have around 20% share of the contestable market. Brambles used to earn 40% profit margins but is currently forecast to earn only 23% profit margin. With iGPS exiting we think the margin potential increases as does the PE rating the company deserves (given it highlights the strong barriers to entry in the pallet business).
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